4 Questions About Europe's Aerospace Mega-Merger

European aerospace giants EADS and BAE Systems, which sell a wide range of products, from military sensors to passenger airliners, on the international market, are preparing to merge. Here's what to look for in the weeks ahead as the deal is forged.

The aerospace industry is no stranger to mega-mergers, but even this sector may not have seen a deal like this. Two huge entities are proposing to merge: the Netherlands–based EADS and London-based BAE Systems. EADS makes the civilian A380 airliner, the Eurofighter, U.S. Coast Guard and Army helicopters, and A400M military transport haulers. BAE makes a slew of electronic warfare equipment such as antiaircraft jammers and sensors used in American weapons systems, as well as military training aircraft and submarines. BAE is also a partner on the F-35 Joint Strike Fighter, seen here.

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The merger would create a company larger than any aerospace company in the world and could reshape civilian and defense markets for decades. Here's what to know about the deal.

1. What's behind this move?

According to a study conducted by Bloomberg, BAE was the U.S. government's ninth-largest contractor for the 2011 fiscal year, with $7.3 billion in direct contracts. EADS ranked 100th with just $684 million in such contracts. So the merger will help EADS sell more gear in the U.S.

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So what's in it for BAE? EADS has footholds in markets where BAE would love to expand, such as helicopters and space. Whereas BAE has strong positions in North America and Saudi Arabia, EADS has good connections in China and Europe.

2. If U.S. defense spending is dropping, why do the Euros want to break into the market?

Even if Congress doesn't manage to craft a new budget deal, which would automatically trigger deep spending cuts, the U.S. defense budget still will be several times larger than almost any two other nations combined. It's a stake worth fighting for even in lean times. With the Pentagon looking at trimming budgets, any merger that results in cheaper bids could give the resulting company an advantage over offers by Boeing or Lockheed Martin.

The other indication that this merger highlights is the lack of a defense budget in Europe. There is an obvious lack of faith that Europe will increase or even maintain its level of defense spending. This has serious consequences for NATO.

3. Will Boeing get even bigger?

Boeing CEO Jim McNerney told reporters in Washington that the deal "does reflect a global consolidation that is beginning to happen." Would Boeing continue this trend by getting even bigger? Here's an oft-floated game-changing idea: Boeing should form solid ties with U.S. Northrop Grumman. Such a behemoth could go toe-to-toe with the new European company.

The real question is what all this consolidation will mean for the customers. The quality of aerospace products could suffer from a lack of variety in defense products, but larger companies could offer money-saving deals that will help governments and other customers during austere times.

4. Will Congress and the Pentagon like having a big competitor for defense contracts—or be bummed by the foreign ownership?

The U.S. government must approve this deal before the new company could bid for federal contracts. For example, the Committee on Foreign Investment in the U.S. must decide if making deals with the new company would be good for national security, and with a "Buy American" attitude in Congress, politics could block the approval. Even if the approval survives Congress, the Pentagon could insist on security clearance "firewalls" on some BAE projects.

But one of the fringe benefits, from America's point of view, would be diminished European governmental influence on EADS, which right now has partial ownership by Spain and France, and whose corporate choices are often influenced by Britain and Germany. Boeing and other defense companies cite this governmental oversight as proof that EADS is subsidized and does not fight fair while bidding. The new company would have no governmental representative on the board of directors.